This article was co-authored by Michael R. Lewis. Michael R. Lewis is a retired corporate executive, entrepreneur, and investment advisor in Texas. He has over 40 years of experience in Business & Finance.

There are 7 references cited in this article, which can be found at the bottom of the page.

Adhering to a household budget is an excellent habit to develop. It will help you to spend less, save more, and avoid problems making payments or paying excessive interest payments on credit cards. In order to create a household budget you will just need to document your current spending and earnings and the financial discipline to adjust your spending so that you will be on better financial footing.

Steps

Part 1

Setting Up Your Spreadsheet or Ledger

1

Decide how you will document your household spending, earnings, and budget. You can use a simple pen and paper but it is much easier to use a spreadsheet program or a simple accounting program if you have access to one.

Calculations in a simple accounting program, such as Quicken, are virtually automated, as they are made for this type of project. This type of program also has additional features that may come in handy for formulating budget, such as savings tools. However, they are not free, so you will need to invest a little bit of money in order to use one of them.[1]

Many spreadsheet programs come with a built-in template for calculating a household budget. They will need to be customized for your specific needs but will be easier than starting from scratch.

You can also use electronic budgeting software, such as Mint.com, which will help you keep track of your spending.[2]

2

Format the columns of your spreadsheet. Work from left to right. Use titles for columns such as "Date of Expense", "Amount of Expense", "Payment Method", and "Fixed/Discretionary".

You need to record in a disciplined way (every day or every week) all of your expenses, as well as your income. Many software programs and apps have mobile apps where you can add your expenses on the go.

The Payment Method column will help you to keep track of where records of your expenses can be found. For example, if you pay your electric bills with a credit card every month to earn miles, note that as the payment method in the column.

3

Categorize your expenses. Each entry should go into a category so you can easily see how much you spend on monthly and yearly bills, regular essentials, and discretionary costs. This will help you when you go to input your expenses and when you want to look through them for a specific expenditure.
Common categories include:[3]

Rent/Mortgage (make sure to include any insurance)

Utilities, such as electricity, gas, and water

Household Operations, such as lawn or maid service

Transportation (car, gas, public transport costs, insurance)

Groceries and other food (eating out)

Using a software program to do this has the added benefit of being able to easily categorize the type is spending (groceries, gas, utilities, car, insurance etc) as well as calculating totals in different ways that are useful to understand what, when, where, how much and how (credit card, cash, etc) you spend. Software will also allow you to divide your spending into different time periods and priorities.

If you are using a paper ledger, you may want to create a separate page for each of these categories, depending on how many expenses you have in each category every month. If you are using software you will be able to add rows easily to fit all of your expenses in.

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Part 1 Quiz

What is the benefit of using a computerized accounting system over a handwritten one?

You can easily categorize your spending.

Try again! A computer program will definitely help you with something like this, but that's not the only reason to consider going digital. It's a good idea to split your spending into different categories, like transportation, student loans, home expenses, and more, but there are other benefits to using a computerized system. Guess again!

You can add your expenses as you go.

Almost! There are a lot of benefits to going digital, and this is just one of them. Many computer programs are portable. If you just finished food shopping, you can immediately input your expenses into your smartphone, rather than remembering to do it later. There are other things to keep in mind, though. Choose another answer!

You have different calculating options.

Not exactly! While not the only benefit of the, computerized budgets are great because you can look at specific numbers -- for instance, how much money you spent with your credit card versus cash. They have other uses too, though! Try another answer...

You can always add more lines or columns.

Not necessarily! There are many reasons to use a computerized budget, and this is one of them! We often don't know what our budget is going to look like until the month is complete, so having the option of adding extra pages, rows, columns or categories is a nice advantage of the electronic budget. Pick another answer!

All of the above.

That's right! An electronic budget has a lot of important advantages. It's often portable while also being easy to customize, search, and edit, and you have a variety of options for organizing how it looks. Still, at the end of the day it is more important that you're keeping a budget than that you're keeping it in the computer. Read on for another quiz question.

Part 2

Documenting Your Spending

1

Put your biggest regular expenses into the spreadsheet or ledger. Some examples would be car payments, rent or mortgage, utilities (such as water, electricity, etc), and insurance (medical, dental, etc). Installation payments, such as student loans and credit cards, also go in here. Make a separate row for each expense. Put in estimates as placeholders until the actual bills come.[4]

Some bills, such as your rent or mortgage, usually stay the same every month, while others are more variable (like utilities). Put in an estimate of your recurring bills (perhaps what you paid the previous year for that specific expense) but once the bill comes and you pay it, put the actual amount into your ledger.

Try to either round up or down to the nearest $10 for an average estimate on how much you spend for each item.

Some utility companies will allow you to pay average amounts all year, instead of having your bill fluctuate each month. You may want to investigate this option if regularity is important to you.

2

Calculate your regular essentials. Brainstorm what you regularly spend money on and how much. How much per week do you spend on gas? What is the usual amount that you spend on groceries? Think of other essential things that you need, not want. After you have made rows for each of these expenses, put in an estimate of what you spend on it. Once you have the actual amounts you spend, input them immediately.

You should spend as normal, but take a receipt or note down every time you get your wallet or purse out. At the end of the day, tally this up, either on paper, your computer, or your phone. Make sure you note exactly what you spent it on and don't use a generic term such as food or transport.

Software such as mint.com help by categorizing your spending into things like Groceries, Utilities, and Miscellaneous Shopping. This can help you see what you usually spend per month on each category.

3

Input your discretionary expenses as well. These include big-ticket items that you can cut out or do not provide you with the level of enjoyment worthy of the price. These could range from anything such as expensive nights out to take-away lunches and coffee.

Remember that each separate expense should have a separate row. This may make your spreadsheet or ledger pretty long by month's end, but if you have it separated into types of expenses you should be able to keep it manageable.

4

Insert an expense row for savings. While not everyone can afford to save money on a regular basis, everyone should have it as a goal and do it if they possibly can.

A great target is 10% of your paycheck. This is enough to make your savings grow fairly quickly while not so much that it will crimp other areas of your life. We all are too familiar with arriving at the end of the month and having nothing left over. That’s why you have to save first. Don’t wait for there to be money left at the end of the month.

Adjust the savings amount as necessary, or, better yet, adjust your spending if possible! Money you save can later be used to invest or you can save with some other purpose in mind, like buying a home, college tuition, vacations, or anything else.

Some banks have free savings programs you can enroll in, such as Bank of America’s “Keep the Change” program. This program rounds up each transaction you make with your debit card and transfers the difference into your savings account. It will also match a certain percentage of this savings. This type of program can be an easy, painless way to save a little bit each month.[5]

5

Add up all your expenditures each month. Add up each section of rows individually and then add them all together. This way you can see what percentage of your income you spend in each category of expenditure in addition to your total expenses.

6

Record all of your earnings and then add them together. Include all earnings, whether it's tips, "under the table" jobs (money you take home, without taxes being taken out), money you find on the ground, and your salary (or monthly balance if you're paid every other week).

This is the amount on your paycheck, not your total earnings for the time period.

Record all income from all sources with the same level of detail as you do for your expenses. Sum these weekly or monthly, as appropriate.

7

Put the totals of your monthly income and your total expenses side-by-side. If the amount of your total expenses is greater than your income, then you need to think about cutting back on your spending or think of ways to cut down your bills.

Having the detailed information on hand about how much you spent on what specific items, as well as the priority that each represents for you, will help you to target areas where you can cut back or eliminate spending.

If your monthly income is higher than your total expenses, you should be able to put some away in savings. This money can be used towards a second mortgage, college tuition, or anything else big. Or, you can stash some away for something small like a trip to the spa.

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Part 2 Quiz

What is a good budget goal?

To break even.

Not exactly! Breaking even is certainly better than not having enough money in the bank to cover your expenses. Still, if you only break even, you won't have the rainy day fund you need in case something goes wrong. Try to adjust your budget so you at least have a little left over. Guess again!

To pay off all your debts.

Try again! You can set the goal of paying off all of your debts, but that might not be possible in a one-month budget. Rather than shaming yourself for not reaching your goal, consider breaking it down into smaller goals, like paying your debt bills for six months in a row. Breaking your goal into manageable chunks can help achieving it feel more manageable! Click on another answer to find the right one...

To put 10% of your paycheck into savings.

That's right! It make take some time for you to reach the full 10% of your paycheck, but it's a good number to aim for it. This will help you build a decent savings without asking for too much sacrifice in the other areas of your life. You never know when you're going to need a rainy day fund! Read on for another quiz question.

To spend less money on ______.

Not necessarily! Sometimes it's a good idea for you to look at your budget and determine the biggest discretionary expenses, things like going to the movies or out to eat. If you find yourself spending several hundred dollars a month on coffee, consider bringing your own from home a few times a week to cut back. Still, there is a more universal goal that everyone should strive for with their budgets. Guess again!

Part 3

Creating a New Budget

1

Target specific areas of your spending to decrease. Set limits on discretionary spending in particular. Pick a set amount that you cannot go over each month and stick to it.

It’s fine to budget for discretionary spending -- you can’t live a life without any fun. However, setting a budget and sticking to it will help keep that spending in check. For example, if you routinely go to the movies, set a budget of $40 a month for movie tickets. Once you’ve spent that $40, you can’t go to any more movies until the next month.

Even your essentials section should be looked at closely. Regular expenditures should usually only take up so much of your income. For example, food purchases should only take up 5 to 15 percent of your budget.[6] If you are spending more than that, you should consider cutting back on that spending.

Obviously, the percentage you spend will vary; for example, for groceries it will vary depending on things like the price of groceries, your family size, and any special nutritional needs. The point is simply to make sure you aren’t spending money you don’t need to. For example, do you spend a lot of money on prepared foods that are more expensive, when you could cook more at home?

2

Estimate and incorporate contingency expenses into your budget.[7] By incorporating expenses for possible contingencies into your budget, unexpected medical, car, or house maintenance costs will have less impact on your overall budget and financial health.

Estimate what you might have to spend on these in a year and divide by 12 for your monthly budget.

Your buffer will mean that if you go slightly over your weekly spending limit, it will not affect your hip pocket and will not end up going on the dreaded credit card.

If you get to the end of the year and have not needed to use your buffer for these types of expenses, then great! You will have extra money that you can funnel into your savings or retirement investment plans.

3

Calculate how much your short term, medium term, and long term goals are going to cost. These are not contingency costs but instead are part of your plan. Do you need to replace any household items this year? Do you need a new pair of boots this year? Do you want to buy a car? Plan for this in advance and you won't need to draw on your long term savings.

Another important point to note is that you should aim to only buy these items after you have saved for them. Ask yourself, do you really need it right now?

Once you actually send the money that was budgeted as a contingency or planned expenditure, record the actual expense and delete the provisional expense you had created, otherwise they will end up being doubled.

4

Draw up a new budget. Combine your buffers and goals with your actual expenditures and income. This exercise will not only assist you in making an effective budget and helping you to save, making your life a little less hectic and more relaxed, it will also motivate you to trim your expenses so you can achieve your goals and make the purchases you aspire to without having to go into debt to do it.

Try to stick to just spending on the fixed expenses. Cut out the discretionary items wherever possible.

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Part 3 Quiz

True or False: You should budget for a certain amount of "fun spending" every month.

True

Correct! If you attend the movies or a monthly jazz night, set aside your best guess for the cost of the event. Once you've reached your limit for the month, avoid spending anymore. This way, you will have money to play and enjoy yourself without wasting what you need for the house or cars. Read on for another quiz question.

False

Nope! We all deserve to have a little fun. Take a look at your budget and see what you have room for. If it's $20 extra a month, considering having a pizza night, if it's more, you can set aside money for the movies or a show. It's important to stick to your fun money spending limit though, as you don't want to eat into your fixed expenses budget. Pick another answer!

Tips

Don't keep all your money in the one pot or bank account. Use a checking account for your spending, a savings account for your short-term savings, an investment account for your mid-term savings, and a retirement account (401k or IRA) for tax-deferred, long-term savings. Following this rule will help you to have the right money in the right place when you need it, both in the present and the future.

To start your household budget, begin tracking your income and expenses. As you track, organize the expenses into categories, like Transportation, Groceries, and Utilities. Then, at the end of the month, add up the expenses in each category. Once you know where your money goes, try to find a few places where you can afford to cut spending, and decide how much you want to cut back. Add your monthly expenses, set your goals, and start sticking to your budget! However, be sure you factor in extra money for emergencies. For tips from our Financial reviewer on categorizing your expenses, read more!

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FEATURED ARTICLE

This article was co-authored by Michael R. Lewis. Michael R. Lewis is a retired corporate executive, entrepreneur, and investment advisor in Texas. He has over 40 years of experience in Business & Finance.

"Praise God... I give this article an A+. I was very shocked and impressed with how simple you guys made this budget plan that I know I can keep. Not only was this budget plan very useful for our expenses at home, it also was very useful toward our business. I will be highly recommending this article to everyone I know! Thank you for making this short, sweet, and downright simple!"..." more

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Breneika Thomas

Mar 6, 2017

"The tips really helped me out on not putting all my money in one spot, which I was, including my husband. I was really inspired about the retirement account, because my husband is self employed/owner and I was wondering what he should do before he retires."..." more

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Nikolay Radulov

Dec 19, 2016

"I have my own program that does all these calculations, and I am verifying that the logic that I use is correct. Also, the budget section helped me to design an automatic budget preparation module in my program. Thank you! "..." more

LC

Luc Carlton

Jun 8, 2018

"This article has made me realize a lot needs to be taken in account specially as a college student. It helped me in a sense of planning before hand, so many thank yous."..." more